During the quarter ended March 31, 2010, we generated revenues of $902,000 compared to $432,000 for the same period in 2009. The $470,000 increase resulted from wider acceptance of our Hip and Spine products by orthopedic and back surgeons. We experienced substantial growth in Spine sales, an increase of $404,000, in the current quarter as compared to 2009. We introduced the resale of interbody spinal devices during the current quarter, which was a major contributor to the increase in Spine sales. There were no such comparable interbody sales in 2009. The current quarter increases in Hip and Spine sales were offset by a slight drop in Knee sales. Our Knee and Hip products accounted for 53% of total sales during the three months ended March 31, 2010 compared to 95% in 2009.

During the quarter ended March 31, 2010, we had cost of sales of $172,000 compared to $82,000 during the quarter ended March 31, 2009. Our gross profit percentage was 80.9% during the three months ended March 31, 2010 compared to 81.1% for the corresponding period in 2009. This slight decrease in 2010 was attributed to sales of Spine products that generate margins consistent with Hip products, both of which yield profit margins lower than Knee products. As acceptance of our reconstructive and spine products continues to grow, it is expected that our 2010 profit margins will remain mostly consistent with 2009 but significant fluctuations in our sales mix can have an impact on the overall gross profit.

During the quarter ended March 31, 2010, we had research and development costs of $286,000 compared to $46,000 for the same period in 2009. The increase in the current year is primarily a result of direct labor allocations and increase volume of custom instruments created for surgeons. Research costs associated with certain Knee and Hip products have increased moderately and are likely to increase in the upcoming quarters as we look to improve our overall product portfolio.

During the quarter ended March 31, 2010, we had selling general and administrative expenses of $1,906,000 compared to $1,536,000 in the same period of 2009, an increase of $370,000. Sales commissions increased by $190,000 in 2010 which was mostly consistent with our higher sales volume. Depreciation and amortization expense increased by $71,000 in 2010 because of the acquisition of additional instrumentation required to support base inventory levels and continued sales increases. Travel to new or prospective hospitals and industry conferences increased in 2010 along with rent and office expenses as we added office space and our overall business activity was greater than it was in 2009. In addition, professional fees increased $101,000 during the quarter ended March 31, 2010 as a result of more regulatory filings and corporate activity.

During the quarter ended March 31, 2010, we had interest income of $7,000 compared to $8,000 during the same period in 2009. Interest income is earned on our excess cash balances, which were comparable in both periods.

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Segment Information

Our businesses are currently organized into the following two reportable segments; reconstructive products (the "Reconstructive Division") and spine products (the "Spine Division"). The Reconstructive Division segment is comprised of activity relating to Cardo's unicompartmental knee, patella-femoral products, and reconstructive knee products. The Spine Division segment is comprised of the spinal lumbar fusion system and cervical plate and screw systems.

These reportable segments are based on the nature of the products offered. Management evaluates performance and allocates resources based on several factors, of which the primary financial measure is segment operating results. Due to the distinct nature of the products in our Reconstructive Division, and the fact that it has a more developed market for its products, it is considered by management as a separate segment. Our Spine Division is still in the process of developing the market and obtaining instrumentation necessary to sell the products in greater quantities. As a result, the Spine Division is considered by management as a separate segment. The accounting policies of the reportable segments are the same as those described in Note 1.

As of March 31, 2010, our Reconstructive Division included $1,233,000 of goodwill and $4,190,000 in other intangible assets, net of amortization, relating to our unicompartmental knee and hip products. These amounts are expected to be deductible for income tax purposes.

The following table sets forth summarized financial results by reportable segment for the three months ended March 31, 2010 and 2009:

All of the Company's net sales were attributable to activity in the United States. There were no long-lived assets held in foreign countries.

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Liquidity and Capital Resources

Net cash used in operating activities was $935,000 for the three months ended March 31, 2010 compared to $983,000 for the same period in 2009. The primary use of cash in 2010 beyond wages and other operating costs was the continued build-up of inventory, which has increased $414,000 during the current year.

Net cash used in investing activities was $350,000 for the three months ended March 31, 2010 compared to $432,000 for the same period in 2009. The cash used for investment activities during the three months ended March 31, 2010 was attributed to the purchase of equipment to accommodate our operational and corporate growth as well as additional instrumentation required in order to support current and anticipated future sales levels.

There was no cash raised by financing activities during the three months ended March 31, 2010 or 2009. Although we may not have sufficient cash to fund our operations for the remainder of 2010, our current working capital should allow us to meet our needs through the third fiscal quarter of 2010.

We raised nearly $6 million net proceeds during the fourth quarter of 2009 through private placements; however, the available funds are not projected to meet all of our working capital needs for the next twelve months. We anticipate that we will sustain losses through the third quarter of 2010, and may require outside sources of additional capital to supplement operations which creates substantial doubt about our ability to continue as a going concern.

Management intends to use borrowings and/or securities sales to provide additional cash to fund our operations. However, we cannot assure you that debt or equity financing, if and when required, will be available. Our ability to continue as a going concern is dependent upon receiving additional funds either through the issuance of debt or through common and/or preferred stock and the success of management's plan to expand sales. Although we may obtain external financing through the sales of our securities, there can be no assurance that such financing will be available, or if available, that any such financing would be on terms acceptable to us. If we are unable to fund our cash flow needs, we may have to reduce or stop planned growth or scale back operations and reduce staff.

Some of the statements in this Quarterly Report on Form 10-Q are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as "may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe," "predict," "potential," "project," "target," "forecast," "intend," "assume," "guide," "seek" and similar expressions. Forward-looking statements do not relate strictly to historical or current matters. Rather, forward-looking statements are predictive in nature and may depend upon or refer to future events, activities or conditions. Although we believe that these statements are based upon reasonable assumptions, we cannot provide any assurances regarding future results. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. Information regarding our risk factors appears in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2009 includes, but is not limited to, the following:

• We may need to raise additional funds in the future to fund our operations and research, and these funds may not be available on acceptable terms, if at all.
• We expect to incur significant losses, either directly or indirectly through the companies in which we develop our products, for at least the next fiscal year, and we cannot assure you that we will ever be profitable.
• We have a limited number of products currently available for sale and there is a high risk that our research and development efforts might not successfully generate any viable product candidates in the future.
• Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and results of operations.

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• Cost containment measures, pressure from our competitors and availability of medical reimbursement may impact our ability to sell our products at prices necessary to expand our operations and reach profitability.
• Sales of our products will depend on the availability of adequate reimbursement from third-party payors (such as governmental programs, for example, Medicare and Medicaid, private insurance plans and managed care programs), both in terms of the sales volumes and prices of our products.
• Legislative or administrative reforms to the U.S. or international reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures could have a material adverse effect on our business, financial condition or results of operations.
• We must convince orthopedic and spine surgeons that our products are an attractive alternative to existing surgical treatments of orthopedic and spine disorders.
• Hospitals, surgeons, distributors and agents may have existing relationships with other medical device companies that make it difficult for us to establish new relationships with them. As a result, we may not be able to sell and market our products effectively.
• Our business plan relies on certain assumptions about the market for our products, which, if incorrect, may adversely affect our business and profitability.
• We expect to face significant competition as a result of the rapid technological changes in the medical devices industry, which could have an adverse effect on our business, financial condition or results of operations.
• We rely on single source manufacturers, which could impair our ability to meet demand for delivering our products in a timely manner or within our budget.
• Loss of any major customer could have a material adverse effect on our business, financial condition and results of operations.
• Our growth will depend on developing new products or product enhancements, requiring significant research and development, clinical trials and regulatory approvals, all of which are expensive and time-consuming and may not result in a commercially viable product.
• If we choose to grow our business by acquiring new and complementary businesses, products or technologies, we may be unable to complete these acquisitions or successfully integrate them in a cost-effective and non-disruptive manner.
• We rely on our independent sales distributors and sales representatives to market and sell our products.
• We are dependent on the services of Andrew A. Brooks, M.D. and Michael Kvitnitsky, and the loss of either of them could harm our business.
• Failure to attract and retain skilled personnel and cultivate key academic collaborations will delay product development programs and business development efforts.
• If conflicts arise between collaborators or advisors and us, any of these parties may act in its self-interest, which may be adverse to our interests and the interests of our stockholders.
• If we fail to properly manage our anticipated growth, our business could suffer.
• If we fail to upgrade our management information systems, or if those systems do not operate as expected, we could experience significant disruption of our business and product developments and our results could suffer.
• If a natural or man-made disaster strikes a facility in which our products are manufactured, we could be unable to deliver our products for a substantial amount of time and our sales could decline.
• If we decide to market and sell our devices and products internationally, we would be subject to various risks relating to our international activities, which could negatively impact our business and financial results.
• We are subject to substantial governmental regulation that could change and thus force us to make modifications to how we develop, manufacture and price our products. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply can have adverse consequences on our business.
• Federal regulatory reforms may adversely affect our ability to sell our products profitably.
• We have not yet collected long-term clinical data to support the safety of our products, and our products may, therefore, prove to be less safe and effective than initially thought.

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• The FDA requires us to obtain new Section 510(k) clearances or premarket approvals for modifications to our approved products. Otherwise, we may have to cease marketing, or to recall, the modified products until clearances are obtained.
• If we or our third-party manufacturers fail to comply with the FDA's Quality System Regulations, the manufacture of our products could be interrupted and our product sales and operating results could suffer.
• Some proponents have advocated the creation of a national database or registry that tracks how patients with artificial joints fare. Any requirement for surgeons to participate in such a registry may adversely affect our ability to sell our products profitably.
• We are an orthopedic medical device company with a limited operating history and our business may not become profitable.
• Our quarterly financial results are likely to fluctuate significantly because our sales prospects are uncertain and our sales are difficult to forecast.
• If we cannot adequately protect our patents and other intellectual property rights, we may lose market share to our competitors and be unable to operate our business profitably.
• Changes to intellectual property laws may negatively impact our ability to protect our intellectual property.
• The medical device industry is characterized by patent and other intellectual property litigation, and we could become subject to litigation that could be costly, result in diverting management's time and efforts, require us to pay damages, and/or prevent us from marketing our existing or future products.
• Patent infringement lawsuits brought against us could have a material adverse affect on our ability to develop and sell our products and to operate profitably.
• We may be subject to damages resulting from claims that we or our employees or consultants have wrongfully used or disclosed alleged trade secrets of their former employers.
• Some countries may require us to grant compulsory licenses to third parties. These licenses could be extended to include some of our products or potential product, which may limit our potential revenue opportunities.
• Fluctuations in the cost and availability of insurance could adversely affect our profitability or our risk management profile.
• Potential future product liability claims and other litigation, including contract litigation, may adversely affect our business, reputation and ability to attract and retain customers.
• Any claims relating to our making improper payments to physicians for consulting services, or other potential violations of regulations governing interactions between us and healthcare providers, could be time-consuming and costly.
• Our common stock may be thinly traded.
• We expect that the price of our common stock will fluctuate substantially, potentially adversely affecting the ability of investors to sell their shares.
• We may become involved in securities class action litigation that could divert management's attention and harm its business.
• Securities analysts may elect not to report on our common stock or may issue negative reports that adversely affect the price of our common stock.
• Anti-takeover provisions in our charter documents and Delaware law may discourage or prevent a change in control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent attempts by our stockholders to replace or remove our current management.
• Because our common stock may be a "penny stock," it may be more difficult for investors to sell shares of our common stock, and the market price of our common stock may be adversely affected.
• A significant number of shares will become eligible for future sale by our stockholders and the sale of those shares could adversely affect the stock price.
• Directors, executive officers, principal stockholders and affiliated entities own a significant percentage of our capital stock, and they may make decisions that you do not consider to be in the best interests of our stockholders.

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• Our stock price could decline as a result of our failure to meet reporting and other regulatory requirements.
• Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
• Our status as a public company may make it more difficult to attract and retain officers and directors.
• Compliance with changing regulations concerning corporate governance and public disclosure may result in additional expenses.
• Stockholders may experience significant dilution if future equity offerings are used to fund operations or acquire complementary businesses.
• We do not intend to pay cash dividends. Any return on investment may be limited to the value of our common stock, if any.
• Our Certificate of Incorporation grants our Board of Directors the power to designate and issue additional shares of common and/or preferred stock.

Additional information concerning these risk factors can be found in our other filings made with the SEC. Forward-looking statements in this Quarterly Report on Form 10-Q should be evaluated in light of these important factors.

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ITEM 4T — CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2010.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following exhibits are filed as part of, or incorporated by reference into this Report:

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS